Question

3. A company's wages and salaries are part of its value added. Suppose, however, that the cleaning and machinery maintenance that its own employees used to do are now contracted out to specialist firms who come in to do the same work more cheaply.

a. What happens to the company's value added when it "contracts out such work?

b. What happens to value added in the economy as a whole

Answer 1

A company's wages and salaries are part of its value added.

a. Now, if the cleaning and machinery maintenance that its own employees used to do are now contracted out to specialist firms who come in to do the same work more cheaply. So this will decrease the company's value added, because when the company's employee used to do that work the salaries of the employees were considered as value added but now, when the company has contracted out this job, the cost or payment they paid for it is now considered as input cost and hence it is subtracted from final value and hence it is not value added.

b. If we see the economy as a whole, the overall value added should remain the same because someone is doing this work and hence adding value. But in present case the value added will increase a bit this is because it is given that the specialist do the work more cheaply. This is because cheap work decreases the cost and hence if small number(small cost ) will be subtracted from the overall value the amount of value added will increase.